Question: We’re a profitable bootstrap NOT looking for institutional funding. Periodically we get inquiries from VC associates. Is there any reason we should or shouldn’t talk to them? Assuming they have plenty of deal flow, and we haven’t been introduced, why would they even bother?

Our Take: If you are profitable bootstrap company and people know about you, there clearly will be outside interest to get “in the deal.” I’ve seen a few deals like this where they get a “hot” label and everyone starts calling and trying to figure out if the team is taking money. Why they bother is that associates are normally trying to prove their worth, create their network and not let any good deals get past them. It might be a real coup if an associate could get your deal in front of one of his or her partners and look good. As for speaking to them, if you really never intend to raise money, then the only reason that you’d want to meet with them is for the free business feedback. If it’s possible that one day you’ll need expansion capital, you might want to start cultivating some relationships. Whether or not these folks have enough deal flow isn’t really the question (although firms that have less deal flow, certain make unsolicited calls more often), rather there aren’t a ton of profitable companies looking for VC money.

Then there is always the startups who again and again publicly proclaim “we are not raising any money, we don’t need any outside funding” and then two months later push out press releases announcing a recently closed round of investment…

http://maxbley.typepad.com/ Max Bleyleben

Your response to this question is unfortunate – there are many VCs who make a living out of investing in profitable companies that don’t need cash. There are many reasons to seek outside investors besides investment capital:
- accelerate expansion with less risk to the core business
- provide partial liquidity for founders
- take out earlier investors who no longer contribute
- gain access to the network of a specialised investor (say, in telecoms)
- take on board experienced investors who can help prepare the business to scale up, or for exit
This is called growth equity. It used to be the preserve of Summit Partners and TA Associates, but there are lots of investors that do this on a smaller scale too.

http://www.bloglines.com/blog/eileen eileen alden

well, as far as growth equity is concerned, if your business is profitable and you want to expand, you could just seek debt financing instead of equity financing – it’d be a cheaper solution.

http://maxbley.typepad.com/ Max Bleyleben

Good point Eileen. But just having profits doesn’t mean a bank will lend to you. There are more and more “venture debt” providers in the market (including in Europe), but it is still very difficult for most growth companies to raise debt financing on reasonable terms. If you don’t have recurring, dependable cash flows, growth equity is the better option. It also gives you more flexibility to run controlled losses if you want to invest in expansion, which debt financing typically prohibits.

http://leighhimel.blogspot.com Leigh

There are starting to be non-financial reasons depending upon who the VC is. A good example was mybloglog.com who didn’t end up taking any money but clearly had a network of relationships (that included VCs) that they leveraged to get their marketing message and product out to.

Beginning in 2005, Brad Feld and Jason Mendelson, managing directors at Foundry Group, wrote a long series of blog posts describing all the parts of a typical venture capital Term Sheet: a document which outlines key financial and other terms of a proposed investment...